House passes audit oversight bill

Democrats say Republican-sponsored bill lacks teeth

By

MattAndrejczak

WASHINGTON (CBS.MW) -- In response to Enron's gigantic failure, the U.S. House of Representatives passed legislation Wednesday to reform oversight of the accounting industry and improve corporate reporting.

The bill, which passed 334 to 90, gives the Securities and Exchange Commission wide latitude in changing accounting industry oversight. It would create a new body to police auditors and bar accounting firms from offering certain consulting services.

However, the Republican-sponsored legislation is expected to run counter to stiffer proposals being considered by Senate lawmakers.

Republican and Democratic lawmakers locked horns Wednesday over how much Congress should tighten accounting industry regulations.

Democrats and consumer groups pushed for more stringent reforms to prevent future Enron-like disasters, accusing the Republicans of offering "cosmetic" changes to the corporate abuses exposed by the failure of the one-time energy giant.

Ohio Republican Michael Oxley, co-author of the bill with Rep. Richard Baker, R-La., blasted the Democrats for trying to smother American businesses with red tape.

"In our zeal to act, we can easily do more harm than good," said Oxley, chairman of the House Financial Services Committee. "I'm confident that we're striking the right balance."

A Democratic substitute bill, offered by Rep. John LaFalce, D-N.Y., the top Democrat on the House Financial Services Committee, was defeated 219 to 202.

Another amendment that would have created a Federal Bureau of Audits to monitor the books of all publicly traded companies also failed to gain passage.

Democrats called the Republican bill too business-friendly.

They also claimed its didn't address proposals suggested by President Bush to improve corporate responsibility, such as new rules to force chief executives to forfeit personal profits gained from false financial statements and to vouch for the accuracy of their companies' earnings reports.

"The bills reflect two different approaches," House Minority Leader Richard Gephardt, D-Mo., said at a press conference Wednesday. "The Republican leadership once again is selling out to corporate interests."

"Don't go home and say you've passed something that is meaningful, when corporate America and the accounting firms and Wall Street are going to give you a pat on the back for letting them escape once again," LaFalce told Republicans during the debate on the House floor.

The American Institute of Certified Public Accountants - the influential accounting industry trade group that has successfully fended off prior regulatory reforms - countered that the bill includes "unprecedented and rigorous reforms in the discipline and oversight of the accounting profession."

Bill punts reform

Under the Oxley-Baker bill, the SEC bears the responsibility for reforming the accounting industry -- something that worries Democrats and consumer groups given SEC Chairman Harvey Pitt's well-documented ties to the industry as a private lawyer.

The legislation directs the SEC to establish a five-member accounting watchdog group that would have statutory power to punish accountants for violating securities laws or standards of ethics.

The body would replace the Public Oversight Board, which is largely funded by the accounting industry. But one drawback is that the body wouldn't have the power to subpoena documents from audit firms if wrongdoing is suspected.

The audit watchdog group would consist of three accountants who had not practiced for at least two years and two members would be from outside the world of accounting.

In an attempt to address conflicts of interest in the Enron fiasco, the bill restricts accounting firms from consulting for clients on financial system design and restricts them from providing both "internal" and "external" audits. However, the accounting industry voluntarily agreed to take those measures after Enron's collapse.

It also requires auditors to keep their work papers for seven years.

Corporate reporting is another component of the legislation.

The bill mandates real-time disclosure of insider stock sales, prohibits company insiders from selling stock during 401(k) lockdowns, and increases disclosure of special-purpose entities made famous by Enron.

Senate's turn

The looming question is whether Congress will produce an auditor oversight bill this year due to the differences between Republicans and Democrats. Time is another hurdle: Congressional races in the fall will shorten the debate.

Three big sticking points appear to be whether Congress should establish an accounting oversight board or leave it up the Securities and Exchange Commission, whether laws should be enacted to substantially ban the consulting services auditors can offer, and the criminal penalties for accounting-law violations.

Senate Banking Committee members Chris Dodd, D-Conn., and Jon Corzine, D-N.J., introduced a bill that would largely strip the accounting industry of its lucrative consulting services.

Senate Majority Leader Tom Daschle, D-S.D., and Sen. Patrick Leahy, D-Vt., chairman of the Senate Judiciary Committee, favor stronger criminal penalties for auditors who destroy work papers. Their bill also extends the timeframe investors can file lawsuits in securities fraud cases to five years from three.

In addition, Sen. Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations, plans to unveil a so-called shareholder bill of rights. It would ban accounting firms from offering nonaudit services to a company during the course of its audit contract and for two years afterward.

Observers are still waiting to see what bill Senate Banking Committee Chairman Paul Sarbanes, D-Md., proposes because his committee exercises jurisdiction over the accounting industry.

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